With my initial warning in mind, the parties in a yacht transaction face several other obstacles if the buyer is unable to obtain conventional bank financing for the purchase. This is particularly true where the boat is subject to a note and mortgage owed by the seller. Bank loans on boats are not transferable without the lender’s approval, and a seller won’t be able to “carry the paper” unless the boat is owned free and clear.
Buyers and sellers often work out various forms of “creative” financing techniques that keep the boat in the seller’s name and rely upon the buyer to make monthly payments directly to the seller’s bank. This arrangement is referred to by lenders as a “wrap,” and it will almost always violate the terms of the existing mortgage and lead to a default if the lender learns of the arrangement. These schemes are also problematic because they are usually accompanied by sketchy “partnership” documents that fail to accurately reflect the true relationship between the parties. And, the seller remains liable for anything that happens aboard the boat during the term of the relationship.
Notwithstanding the obstacles to seller-financed transactions, it may be possible to put this kind of deal together using a traditional maritime security interest known as a “bareboat charter.” A bareboat charter (also known as a “demise charter”) is a lease arrangement where the charterer (the buyer, in this case) takes on all of the rights and obligations of ownership without actually transferring title, and the owner (the seller) is generally protected from liability against third parties.
Bareboat charters are common in the world of commercial shipping, where complex tax and vessel registration laws may encourage a lender to take ownership of a ship rather than to simply record a mortgage. That lender, however, would of course prefer to avoid the owner’s responsibility for a disaster such as an oil spill in Alaska. Similarly, a ship owner who wants to make use of excess capacity by leasing a vessel to another shipping company will need to be protected from the possible negligence of that vessel operator.
Bareboat charters were developed to meet these commercial needs, but the arrangement is not limited to big ships. Like most principles of maritime law, bareboat charters were developed to manage the safety and commerce of ships at sea, but they are equally applicable to recreational boats.
A bareboat charter has the effect of shifting the possession and control of the vessel — and liability for injuries to third parties — from the owner to the charterer. To create a bareboat charter, the owner of the vessel must completely and exclusively relinquish possession, operation, maintenance, command and navigation of the boat to the charterer.
The owner must be completely removed from the operation of the vessel, except for issues that directly concern the owner’s security in the vessel as collateral, such as setting geographic limits on the vessel’s operation and requiring particular types and limits of insurance. If the owner is allowed to manage or operate or care for the boat in any way, it is not a “bareboat” charter, and it therefore does not protect the owner from liability.
A bareboat charter is probably the most effective method to transfer the responsibility for operation of a boat without transferring title, but it may nonetheless violate the terms of the seller’s mortgage. A mortgage may include language to prohibit commercial use of the vessel and a bareboat charter may be deemed to fall under that heading.
This restriction may be subject to different legal interpretations and it will vary for each transaction and each lender. Similarly, many marine insurance policies prohibit or restrict the chartering of the boat, though these restrictions may not be relevant if the owner and charterer are both named on the policy. Regardless, the language of the mortgage and the insurance policy must be carefully reviewed before drawing any conclusions.
Vessel mortgages, charters, and other commercial maritime relationships are complicated and outside of the range of experience for most attorneys. A maritime attorney experienced in these transactions should be consulted for a more detailed discussion of these issues.